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Investors wary of liability plan

Representatives from the Big Four issue proposal for a new law to limit
auditors' liability amid concern that auditors will face a wave of litigation
from investors and liquidators who are trying to recover losses from big company
failures

A proposal by leading accounting firms for a new law to limit auditors’
liability for company failures will face opposition from leading investors and
shareholder advisers.

Representatives from the Big Four firms met officials from the Department for
Business Enterprise and Regulatory Reform last week amid concern that auditors
will face a wave of litigation from investors and liquidators who are trying to
recover losses from big company failures.

Currently, an auditor can be sued for unlimited losses when a company
collapses, even if they were judged to be only partly to blame. Company
directors can limit an auditor’s liability, with the agreement of shareholders,
although no big companies are thought to have done so.

Michael McKersie, assistant director, capital markets, at theAssociation of British
Insurers, whose members control about 15% of the UK stockmarket, said it was
sympathetic to the principle of reform of liability for auditors.

But he questioned whether ‘hard wiring’ proportionate liability into UK law
was a wise move, citing uncertainty over how courts would interpret the rule
when deciding the damages auditors.

‘Auditors do have a legitimate concern that they are the deep pockets in the
current situation,’ McKersie said.

‘Proportionate liability is less detrimental to shareholders than previous
[suggestions] such as monetary caps on liability, however, we have not yet
considered the implications of proportionate liability being compulsory.’

Other options for auditor liability include holding the auditor liable to no
more than two times the total damages that would be directly attributable to the
auditor, McKersie added.

A spokesman for Pirc,
the UK body which advises UK shareholders on corporate governance issues, said
it opposed making auditor liability statutory.

Peter Wyman, head of public policy atPricewaterhouseCoopers, has
said one compromise solution, which might satisfy US regulators, would be to
limit auditor’s liability in law to the proportion of their client’s loss which
they are responsible for.